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Tax Hikes for Workers

Time last week got the scoop on Josh Bolten’s Five-Point Plan to protect the Bush administration from that which it fears the most -- subpoena power - through the familiar strategy of firing up their base. All of them seem lame or craven, or grotesque, not least the promise to ratchet up tensions with Iran for political reasons. “In the face of the Iranian menace, the Democrats will lose,” says a source described as “a Republican frequently consulted by the White House.” But let’s focus on Point three:

…the Administration will focus on two tax measures already in the legislative pipeline-extensions of the rate cuts for stock dividends and capital gains. … “This is very popular with investors, and a lot of Republicans are investors,” the adviser told TIME.

It’s true, more than half of households are now investors in equities, directly or through funds, and an even greater proportion of Republicans. But here are a few statistics from the Tax Policy Center: 16.8% of taxpayers report dividends. Even for people with income between $100,000 and $200,000, capital gains make up only 12% of their income, and for households in the $50,000-$75,000 range, the heart of the middle class, it’s only about 2%. Capital gains don’t make up more than half of income until you get into the range of people making not just millions, but 10 million dollars or more a year.

But the point is not just that this is a tax cut that benefits principally the super-rich. It discriminates between people based on how they get their income. If you work, and you are fortunate to earn a good living from your labors, you are likely to pay a tax rate more than twice that someone living off the income generated by a trust fund.

Defenders will say that it is an incentive for investment. But it does not reward the act of investing; it rewards the act of taking money out of an investment. Consider this: a trust fund kid could liquidate some stocks his grandpa bought, buy expensive imported luxury goods, and pay only 15% on the capital gains. That is rewarding a net reduction in savings and investment, and if you don’t think it happens, meet some trust fund kids. Meanwhile, a person who works for a living and through careful planning saves or invests some of it gets no benefit today, and only a potential a benefit in the future.

And of course it gets worse. Recently both Greg Mankiw and Glenn Hubbard, two former heads of the Council of Economic Advisors under Bush, pointed out this week that tax rates are going to go much, much higher, as high as a 50% top rate. Actually they said they would go higher unless there were massive cuts to Social Security, Medicaid and Medicare, which seems to be part of an orchestrated campaign to blame "entitlements" for the budget crisis, rather than tax cuts. But since neither party, for good reason, has the appetite for such cuts, what they really mean is that taxes are going up, up, up. If members of Congress vote to extend the 15% rates, and other rates go up, then in effect, to vote for the continued special treatment of investment income is equivalent to voting for a tax increase for anyone below roughly that $10 million threshold - that is, anyone who gets more of their income from work than from sitting on their butts watching their investments grow.

This is a fight that Democrats should not shy away from. And they shouldn’t muck it up the way Kerry did, saying that he supported restoring taxation of capital gains but only for people making more than $200,000 a year. That mixes a message about rich vs. poor with a very simple message that cannot be called class warfare: treat all income the same and people in the same situation should pay the same taxes whether they are investors or workers.

Posted by Mark Schmitt on May 2, 2006 | Permalink

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Comments

Should be careful here at least to notice the difference in the AMT crowd and the cap gains crowd.

The bill includes the AMT adjustment for inflation to keep a bunch of "middle class" folks from getting hit by the AMT. Never mind that the AMT is a lot like the "flat tax" system conservatives sometimes espouse (flat, except they would exempt investment income completely, ha ha).

Politicians on both sides of the aisle will gladly vote to keep AMT from becoming the defactor primary source of income tax revenue. But Republicans never talk about any permanent fix for AMT, and always exclude the cost of extending AMT indexing to inflation when they account for how they will pay for more tax cuts for the investor class.

Posted by: TwentyFirstCentury | May 11, 2006 12:27:47 AM